IDEAS home Printed from https://ideas.repec.org/a/rsk/journ4/2161190.html
   My bibliography  Save this article

Coherent allocation of risk capital

Author

Listed:
  • Michel Denault

Abstract

ABSTRACT The allocation problem stems from the diversification effect observed in risk measurements of financial portfolios: the sum of the risks of many portfolios is larger than the risk of the sum of the portfolios. The allocation problem is to apportion this diversification advantage to the portfolios in a fair manner, yielding, for each portfolio, a risk appraisal that takes diversification into account. Our approach is axiomatic, in the sense that we first argue for the necessary properties of an allocation principle and then consider principles that fulfill the properties. Important results from the area of game theory find a direct application. Our main result is to provide conceptual justification for a risk allocation principle that is based on the gradient of the risk measure. A numerical example based on the rules of the Securities Exchange Commission for margin computations is provided.

Suggested Citation

Handle: RePEc:rsk:journ4:2161190
as

Download full text from publisher

File URL: https://www.risk.net/system/files/import/protected/digital_assets/10102/Coherent_allocation_of_risk_capital.pdf
Download Restriction: no
---><---

More about this item

Statistics

Access and download statistics

Corrections

All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rsk:journ4:2161190. See general information about how to correct material in RePEc.

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

We have no bibliographic references for this item. You can help adding them by using this form .

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Paine (email available below). General contact details of provider: https://www.risk.net/journal-of-risk .

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.